* Ethos opposes dividend payment to avoid CoCos
* C.Suisse says Ethos move "incomprehensible"
* C.Suisse AGM on April 29, UBS on April 28
* Ethos says C.Suisse, UBS bonuses still too high
* Credit Suisse shares down 2.0 percent
(Adds Ethos comment, detail, ISS position)
By Emma Thomasson
ZURICH, April 14 (Reuters) - Swiss activist investor Ethos wants shareholders to oppose Credit Suisse issuing conditional capital to help it meet tough new rules, saying it should instead sell its investment bank's trading activities.
Ethos, a group of more than 100 institutional investors promoting sustainable development, urged shareholders to reject the creation of conditional capital to cover the contingent convertible bonds (CoCos) Credit Suisse issued in February.
Ethos executive director Dominique Biedermann said Credit Suisse should sell the investment bank's trading activities, which would mean it would not need to issue CoCos.
"If they stop this kind of activity now, the need for capital would be less important," he told Reuters. "You see that there is an economic loss long-term. Do we really want our capital to be used for activities that produce nothing?"
Under strict new capital rules drawn up after the crisis, Switzerland has encouraged its two biggest banks -- UBS and Credit Suisse -- to issue CoCo bonds which boost capital by converting into equity if a bank runs into trouble.
Financiers have said the tough Swiss regulations could put the country's banks at a disadvantage to their international rivals, raising questions about whether they can continue to compete in investment banking.
Credit Suisse said it had worked closely with Swiss authorities on the use of CoCos and played a lead role in a creation of the market for the bonds.
"Credit Suisse finds it simply incomprehensible that Ethos is not supporting these efforts to build a more stable financial system," the bank said in a statement.
"We are fully convinced that our measures are also in the interests of our shareholders, since any other form of capital increase would have a direct dilutive effect."
Funds affiliated to Ethos only own about 0.1 percent of Credit Suisse's share capital but the group is influential among institutional investors and managed to persuade about a third of the bank's shareholders to reject its bonus policy last year.
Credit Suisse shares were down 2.0 percent at 12.02 GMT while UBS was off 0.6 percent.
BUILDING CAPITAL
Credit Suisse issued its first CoCos in February in a positive sign for the nascent market for the bonds, which had initially received a cool reception from traditional fixed income investors.
Ahead of the Credit Suisse annual general meeting on April 29, Ethos also said it opposed the payment of a dividend "to reinforce the bank's core equity and avoid issuing CoCos".
UBS has said it will not pay a dividend for the foreseeable future as it retains earnings to build capital.
Ethos said the trading results of Credit Suisse's investment bank were very volatile and the risks it took could "endanger the stability and the reputation of the bank".
Ethos noted 60 percent of the conditional capital Credit Suisse wants to issue will be reserved for the CoCos it sold to its two largest investors Olayan Group and Qatar Holding at what Ethos called "particularly favourable conditions".
Proxy advisory firm ISS has recommended that shareholders vote in favour of the conditional capital despite concerns about potential dilution, as it was exclusively to issue CoCos "to comply with capitalisation requirements imposed by Swiss law".
Ethos also urged shareholders to reject the remuneration reports of Credit Suisse and UBS despite changes made to their bonus schemes after protests Ethos led at last year's AGMs in non-binding votes against both banks' bonus policies.
"Ethos considers that the variable remuneration remains high and is not capped," it said.
It called the average pay of 388,000 Swiss francs for the 20,000 employees of Credit Suisse's investment bank "excessive" and said the fees paid to the board members of both the Swiss banks were among the most generous in the world.
ISS also suggested shareholders vote against the remuneration report due to "continuing concerns about lack of potential safeguards against poor pay practices".
Credit Suisse boss Brady Dougan was paid $14 million in 2010, despite the bank's shares losing a quarter of their value, while UBS CEO Oswald Gruebel waived his bonus for a second year running but took a higher base salary than Dougan. (Additional reporting by Nathalie Olaf-Ors, Editing by Mike Nesbit)